Article: How to address fraud in an integrated fashion across multiple channels
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Interview with Keith Briscoe, Chief Marketing Officer, Ethoca
Keith Briscoe, Ethoca: There are many cross-channel and multichannel services; we have not actually seen the true promise of the omnichannel product to be delivered to the market yet
Could you provide some more insights into the collaboration-based technology that Ethoca has built?
Our network facilitates collaboration between card issuers and ecommerce merchants. It is an alternative set of rails – outside of the chargeback process – that enables issuers and merchants to communicate confirmed fraud and customer dispute intelligence in near real-time and take quick and decisive action to recover revenue and halt the impact of chargebacks.
Through the card network rails, the merchant might not discover fraud until after it is confirmed between the cardholder and their bank – that could be up to six weeks later through the chargeback process. We work with banks around the world to get their fraud and customer dispute data in near real-time. We then deliver this data to participating merchants in minutes or hours, instead of weeks. Merchants can take immediate action to stop fraud and the shipment of goods, as well as refund the transaction to avoid the chargeback.
Which are, in your opinion, the top five ecommerce-related fraud trends for 2017?
Friendly fraud is certainly one of the increasing trends that we see in the digital space, where the numbers are astronomical: up to 60-90% of fraud is friendly fraud. Digital goods brands are very good at detecting legitimate fraud, so the vast majority of fraud cases that remain tend to be friendly fraud.
In one of the most basic friendly fraud situations, children or secondary card users in a household make a purchase online, unbeknownst to the primary account holder or parent. This leads the primary to contact their issuer and dispute. In this situation, the transaction is in fact legitimate, which is why banks and merchants struggle to detect it.
The second trend I would identify is false declines. Fraud is becoming an acceptance-related problem, and this is where most of the attention seems to be gravitating. Some estimates suggest that for every dollar of actual fraud, 13 dollars of good cardholder transactions are being rejected. Cardholders that get falsely declined choose to either go to another website to make a purchase, or send that issuer’s card to the back of the wallet – that has a negative impact on both card issuers and merchants.
The third trend is the continued migration from card-present to card-not-present fraud. With the U.S. adoption of EMV, this is having a global CNP ripple effect that is driving fraud to the least protected and most vulnerable online channels.
Another trend is the incredible adaptability of fraudsters who, even with stronger anti-fraud measures in-place, still find ways to exploit the system. Anti-fraud measures are usually effective for a period of time until fraudsters learn to exploit new vulnerabilities, so we tend to see a continued, cyclical pattern of fraud spikes. We expect this overall cycle to continue, but one thing our merchant customers can do is leverage the power of more timely confirmed fraud data to stop other related orders and improve their future fraud screening processes.
Last but not least, there is cross-border fraud. It is no surprise that cross-border decline rates continue to be high relative to domestic transactions. Although from an international trade and ecommerce perspective there continues to be increasing revenue opportunity, the risk of insult from false declines on cross-border transactions is a continuing threat to truly global, frictionless ecommerce payments.
Do you think there is a real need for a multichannel online fraud prevention and detection model?
Given the rapid evolution of omnichannel and the ability to connect fraud patterns across channels, yes. Omnichannel continues to be the buzzword topic on the conference circuit, though the industry continues to focus on the ‘what’ – not the ‘how’. I would say machine learning is emerging as one viable mechanism to potentially be effective in an omnichannel environment – as some in the industry feel a rules-based approach may not provide the speed and refresh flexibility necessary in such a dynamic and shifting environment. However, a multi-layered strategy comprised of multiple, complementary tools (including collaboration-based solutions), will likely offer a powerful, yet flexible, defense. Rules-based systems will likely adapt and many are already including elements of machine learning to take a ‘best of both worlds’ approach.
What is your take on the role that the government has in addressing fraud, compared to the role of the main players in the private sector? Is there a balance or is there the need for a balance?
There is definitely a need for a balance and we saw some of that reaction around the PSD2 regulation with the open letter to the industry that was created. There is significant concern around unnecessary friction and abandonment associated with a multi-factor authentication process. So, yes, a balance should definitely exist. The EBA has already responded by relaxing some of the PSD2 rules where strong authentication would be required and adjusting the transaction limits. This balance is important because what is at stake is the customer experience – all parties need an ecosystem that values their needs and interests. That said, it’s easier said than done!
Around numerous regulations enforcing consumer security, such as PSD2, GDPR and the 4th AML directive, how should businesses prepare?
Although they can be addressed separately, there is an increasing power coming from tackling them holistically and we constantly see these types of regulations emerging as consumer protection continues to be an issue. However, I believe that the balance has shifted in favor of the cardholder and consumer in ways that are potentially damaging, leading to an increase in friendly fraud. Cardholders have learned how to exploit the system for their personal gain. Therefore, some of these regulations need to be re-addressed, creating a better equilibrium between merchant interests and consumer protection.
What new developments will the industry witness in the next three years?
We are going to see most of the big fraud problems tackled by solutions providers, with a more entrenched collaboration between merchants and card issuers. Our research has shown that out of the fraud detected by card issuers 58% is not visible to the merchant, and from the fraud that merchants are detecting, 19% is unknown by the card issuer. So, we continue to operate in silos even though there is a lot of opportunity to collaborate and ensure that everyone in the payment lifecycle – except the fraudster – gets more value and enjoys a better online experience.